$(10$ pts$)$ Sambuka, Inc. can issue annual coupon bonds in either U$.$S$.$ dollars or in Euros that

mature in three years. Dollar$-$denominated bonds would have a coupon rate of $4\mathrm{.}5$ percent;

Euro$-$denominated bonds would have a coupon rate of $3\mathrm{.}5$ percent. Assuming that Sambuka

can issue bonds worth $$10,000,000$ in US dollars or $8$ million Euros, given that the current

exchange rate is $$\frac{1\mathrm{.}25}{1}$ Euro.

a$)$ If the forecasted exchange rate for the Euro is $$\frac{1\mathrm{.}30}{1}$ Euro for each of the next three

years what is the annual cost of financing for the Euro$-$denominated bonds? Which type

of bond should Sambuka issue?

b$)$ If the forecasted exchange rate for the Euro is $$1\mathrm{.}20$ for each of the next three years what

is the annual cost of financing for the Euro$-$denominated bonds? Which type of bond

should Sambuka issue?